Long-term inflation target of 1.7% to 2% set by Fed

The U.S. economy has weakened further and a gradual recovery in economic activity isn’t expected until later this year, Fed policy makers agreed, according to minutes released Wednesday and taken during the closed-door Federal Open Market Committee (FOMC) meeting Jan. 27-28.

The committee also noted their outlook had significant "downside risks," and provided a set of informal long-term economic projections, including that of inflation at 1.7% to 2%. After the meeting, the FOMC held the federal funds rate to a range of between 0 to 0.25%, as it first set in December, and concluded low interest rate levels would need to be kept for some time.

The released minutes make it clearer, however, how some members see the potential for excessive disinflation in 2009, or a deflation risk as St. Louis Fed’s Bullard addressed in a speech Tuesday. Deflation is a persistent decrease in general prices, or the opposite of inflation.

"Many participants noted some risk of a protracted period of excessively low inflation, especially if inflation expectations were to move down in response to lower actual inflation and increasing economic slack, and a few even saw some risk of deflation."

On the flip side, some members noted a risk that inflation could go the other way.

"Some [committee members] noted a risk that expected inflation might actually increase to an undesirably high level if the public does not understand that the Federal Reserve’s liquidity facilities will be wound down and its balance sheet will shrink as economic and financial conditions improve."

One thought on “Long-term inflation target of 1.7% to 2% set by Fed”

I would like to read a rebuttal of my opinion that a 2% inflation goal by the agency charged with currency stability is not different from the medieval royal practice of coin-shaving, for which the cure was milling the edge to prevent such chicanery.